In a Regulatory First, JPMorgan Suspended from Trading in Energy Market

A unit of JPMorgan has been suspended from trading in the California Energy Market for six months at market rates, but in a nod to the fragility of the system the company was given five months to make a strategic withdrawal.

The suspension of JPMorgan Ventures Energy Corp. by the Federal Energy Regulatory Commission (FERC) Wednesday was a first for the agency, which has announced 11 investigations of traders for manipulating the state’s power market. It reached a $245 million settlement with Constellation Energy Group Inc. and is seeking a record $469 million from Barclays.

The next day, JPMorgan was confronted by another regulatory agency when the California Independent System Operator (ISO), which runs the state’s power grid, petitioned federal regulators to stop the company from blocking two Huntington Beach power plants from upgrading their systems and relieving pressure on the strained state’s power supply.

FERC’s action came after JPMorgan stonewalled the agency on requests for documents pertaining to an investigation of whether the traders attempted to manipulate energy prices. “The company made factual misrepresentations and omitted material information over the course of several months of communications with the California Independent System Operator (California ISO) and in filings to the Commission in connection with requests for information involving bidding activities in the California market,” FERC said in announcing the suspension.

While not flat out saying that JPMorgan was involved in fraud, deception or misrepresentation, the federal agency made clear that, “In granting market-based rate authority, FERC expects that a company’s behavior will not involve fraud, deception or misrepresentation.”

California, which just this week kicked off a new carbon cap-and-trade market expected to soon be the world’s second-largest, does not benefit from any perceptions that its markets are unstable and susceptible to manipulation by sophisticated financial institutions.

Energy experts consulted by the Los Angeles Times say the JPMorgan scheme involved manipulation of the state’s market-based energy auction system. The bank essentially submitted preliminary low bids for energy (perhaps even at a negative amount), thus qualifying for “a bid cost recovery” payment even if they weren’t accepted. Those bids would be money losers for JPMorgan if accepted, but the next day it allegedly submitted real bids too high to be accepted and pocketed the windfall.

Papers filed in federal court said the trader’s bidding practices may have inflated consumer electricity costs by more than $57 million, but that just covers a six-month period. Some estimates put the cost to utility users as high as $200 million. Enron’s gaming of the newly-deregulated energy market in 2000 cost taxpayers $1.4 billion.

FERC said it was giving JPMorgan five months to get out because of the company’s contractual obligations and to “give the California ISO and its market participants time to take necessary steps to maintain system reliability during the suspension period.”